Monday, April 2, 2012

Indian API Companies - The lure of attractive valuations

In quest of extraordinary returns, Investors are generally lured by companies which are trading at low single digit P/E multiple, and at the same time also delivering extraordinary profit growth. Looking at such imbalance in valuations and financial performance, any investor would certainly question the market’s rationale.   But I believe markets are generally smarter quite often than not, as most of these companies which appear to be low hanging fruits, tend to be managing their books to bloat their profit numbers.  
A case in point are some of the Active Pharmaceutical ingredient companies in India, which despite registering very robust Topline and bottom line growth still trade at low single digit price earning ratio.  I have been closely tracking the pharmaceutical sector in India and got the opportunity to dig into the details. The general characteristics of companies that are managing their books is

1)  A very skewed Debt- Equity ratio, much greater than one
2)  A fast growing debt also accompanied by sales growth, but declining margins
3)  Deteriorating Return ratios (Declining RoE)
4)  A declining Net Profit Margin
5)  Interest coverage ratio is very uncomfortable,  less than 3
6)  Low Single digit Dividend Payout 
7) Tax rate on book profits is either zero or very less < 5

1 comment:

  1. I'm always checking out your blog help posts and such to answer some questions I may have. Thanks for everything, what is cfd trading.